FSA bans commission

EdInvestor

A good move, pity we have to wait until the end of 2012 for it.


http://www.ft.com/cms/s/2/d2c98efc-626d-11de-b1c9-00144feabdc0.html

dunstonh

You dont have to wait. Many companies and products already work to the new system.

Aegis

I actually think this is a very short-sighted view from the FSA. The option for hybrid fee paying will effectively disappear, making charges a matter of paying an hourly fee plus VAT to the adviser. Because of the VAT, the fee paid will effectively be 15% higher than it currently would be if the fee was paid from product commission and the rest rebated.

The article also highlights that this will be more expensive for the less wealthy clients. It certainly will. It will be completely ineffective to go to an IFA for small sums, as the work associated with doing a full factfind and assigning investments to that customer, plus occasional ongoing reviews (which will also now have to be paid for separately rather than through trail commission) will make the fee higher than the commission would have been. For example, someone investing £30k at 2% commission would have been charged £600 up front and would have had the option of ongoing service paid from the trail. Now it's possible that they'll pay easily over £1000 for 4 or 5 hours work plus VAT on top, effectively doubling the charge and making sure that they have to pay more charges if they ever want to take a look and rebalance their portfolios.

I think a better option would have been to force adoption of a 3-tier charging system: commission only, fee paying and hybrid fee paying.

I suspect that as a workaround many IFAs will end up charging an ongoing fee for whatever amount they actively service for a customer to assist their business when the harder times roll around (like the market crash we saw last year: without new business many IFAs would have been relying on their trail commission to stay afloat). This could always end up being more expensive again, but the FSA doesn't seem to mind that as long as it's "more transparent".

About the only good thing about this is that some of the large and very aggressive salesforces will probably have to become much more cost-effective to compete on a like-for-like basis.


EDIT: can we also assume that this means that all initial charges from funds will be paid in full by a customer going through an IFA on top of any charges they already have to pay for the advice?

dunstonh

The article also highlights that this will be more expensive for the less wealthy clients. It certainly will. It will be completely ineffective to go to an IFA for small sums, as the work associated with doing a full factfind and assigning investments to that customer, plus occasional ongoing reviews (which will also now have to be paid for separately rather than through trail commission) will make the fee higher than the commission would have been. For example, someone investing £30k at 2% commission would have been charged £600 up front and would have had the option of ongoing service paid from the trail. Now it's possible that they'll pay easily over £1000 for 4 or 5 hours work plus VAT on top, effectively doubling the charge and making sure that they have to pay more charges if they ever want to take a look and rebalance their portfolios.

Totally correct and guess who benefits from that? The banks and their salesforces. It will send the bottom end, volume market to the banks and insurance companies.

I suspect that as a workaround many IFAs will end up charging an ongoing fee for whatever amount they actively service for a customer to assist their business when the harder times roll around (like the market crash we saw last year: without new business many IFAs would have been relying on their trail commission to stay afloat). This could always end up being more expensive again, but the FSA doesn't seem to mind that as long as it's "more transparent".

What you will find IFAs doing (already) is splitting their business into transactional and servicing. Small value transactions wont be offered servicing generally as it wont be cost effective to them.

About the only good thing about this is that some of the large and very aggressive salesforces will probably have to become much more cost-effective to compete on a like-for-like basis.

That doesnt appear to be happening. The insurance companies are looking to restart their salesforces. Almost certainly on a transactional basis.

Remember that the fee can be deducted from the product. Despite all focus on commission removal. The main difference is that instead of the companies setting the remuneration, the adviser will be. So, lets say a product currently pays 3% commission under current rules. Under the new rules the adviser can decide to take 3% as a fee. Then they can factor that into the annual management charge or initial charge giving you exactly the same situation as you have now.

EDIT: can we also assume that this means that all initial charges from funds will be paid in full by a customer going through an IFA on top of any charges they already have to pay for the advice?

Not all of the initial charge goes to the IFA. Some is kept by the fund supermarket or fund house. However, there is a bit of a price war going on at the moment with the fund supermarkets and they have been progressively removing their cut of the initial charge or getting the fund house to remove theirs. Skanda/Selestia now have no initial charges at all and the full trail commission can be rebated (apart from ISAs where there is some debate on whether the rebate is actually a contribution to the ISA or not - Something HL and the other fund supermarkets disagree on). The adviser decides what initial (fee) is taken from the investment and how much ongoing remuneration they want.

Remember we used to mention customer agreed remuneration? Well this is it.

One other point that I seem to think is more important (and it will be to any NMA IFA) is that the authorisations of products that IFAs can recommend on will be expanded. Non packaged Investment Trusts and ETFs will be available to IFAs as well.

Overall, in the scheme of things, I dont see a lot of difference to the average person. Companies are still going to want to take their cut. HL for example, currently get the trail and rebate a percentage on each fund. In future, they will probably get no trail but add 0.25% in to equate to what they have now. The consumer wont be able to buy at the factory gate price as the retailer will always add their cut in. However, it will now be the retailer that decides that cut and not the provider.

EdInvestor

Why are IFAs so much more expensive than estate agents and solicitors?

It isn't apparent that they have higher skills, or that the work they do is more complex or time consuming, indeed in many cases it is quite the reverse.

dunstonh

Why are IFAs so much more expensive than estate agents and solicitors?

I didnt know IFAs sold houses or did legal work.

It isn't apparent that they have higher skills

Some will have a level 4 qualification, others will have higher (to degree level).

or that the work they do is more complex or time consuming,

Typically 4-6 hours on a simple case.

The cost of operating an office, staff, compliance, software (virtually all of which is on ongoing cost licensing), lifetime of liability (although the FSA may need to review that as it looks like it breaches human rights laws) etc all have to be factored in. And of course, knowledge and experience. Its not what you do most of the time its knowing what you have to do.

I'm not sure why you are focusing on IFAs Ed. IFAs are the cheapest advice distribution channel and IFAs also the ones that do the most discounting on direct and execution only transactions. Most IFAs are not actually going to have much of an issue with these changes.

TEDDYRUKSPIN

Erm, I was expecting this and so should you! Commission basis is no longer sustainable and many of you would have noticed this. To be honest, how many clients do you see who pop into an IFA with £5k or less and ask for your service?

This is just a draft and will fine tuned. I welcome this system. Too many advisers rely on commission basis from other companies and the rate of pay is rubbish. By allowing a upfront fee, many advisers will now get paid and also provide a true service to clients.

About banks and building societies winning? As you are just providing advice as an IFA, you will have a better privilege of true WHOLE OF MARKET service.

Jonbvn

Aegis wrote: »

I actually think this is a very short-sighted view from the FSA.

Given that you work for a bank, perhaps your viewpoint is to be expected?:money:

As always beware of VI!

Aegis

Jonbvn wrote: »

Given that you work for a bank, perhaps your viewpoint is to be expected?:money:

As always beware of VI!

Errr, no. If you look through my track record you'll see that I habitually claim that bank salesforces are the worst place to go for financial "advice" and that I think that IFAs are the best for those who need advice on the matters that are covered by the term "financial advice".

I simply believe that this is far too much of a nanny-state policy which could potentially take away the freedom of customers to effectively negotiate the most favourable terms, and I see it as an opportunity for the cost entry into various investment funds to be increased under certain conditions. I'm worried that there isn't enough information about what the FSA is going to mandate for initial charges on unit trusts and OEICs, for example, as these are currently heavily discounted by going to an IFA and splitting the commission with them or having it fully rebated. If commission is banned, commission rebate will be banned. If the initial charges then stay at 4-5% on average, the total cost of financial advice could easily shoot up to over 7% once the investments have been made.

I'm assuming this has been addressed, but I'm trying to read through the changes to try and work out how.

EdInvestor

dunstonh wrote: »

Some will have a level 4 qualification, others will have higher (to degree level).

Typically 4-6 hours on a simple case.

The cost of operating an office, staff, compliance, software (virtually all of which is on ongoing cost licensing), lifetime of liability (although the FSA may need to review that as it looks like it breaches human rights laws) etc all have to be factored in. And of course, knowledge and experience. Its not what you do most of the time its knowing what you have to do.

A financial advisor may charge up to 7% commission for his 4-6 hours work. An estate agent, typically might charge 1.5% of the value of a property to sell it, and this takes massively longer and is much more complex.

A solicitor (who must have at least one degree) will charge much less and may well end up spending 4-6 hours on a property conveyance especially if it is a leasehold flat. All have office, staff, insurance and IT costs to meet.

I'm afraid I can't see the justification for paying financial advisors at the rates they command via the current opaque system.

I imagine they know that many clients will tend to take the same view and this is why so many of them are planning to exit the business before the new rules come in.

Myrmidon_J

Aegis wrote:

I simply believe that this is far too much of a nanny-state policy which could potentially take away the freedom of customers to effectively negotiate the most favourable terms...

I agree. The government has an appalling record when it comes to regulating the financial services industry; there is a tendency to flip from one extreme to another without ever really dealing with any of the problems.

The RDR is a joke, in my opinion, and has very little merit.

Incidentally, I've always felt (on this board) that Aegis is a terrible advocate for the banks. I mean this as a compliment, of course.

EdInvestor wrote:

I'm afraid I can't see the justification for paying financial advisors at the rates they command via the current opaque system.

I imagine they know that many clients will tend to take the same view and this is why so many of them are planning to exit the business before the new rules come in.

That, and the skills / qualifications requirement!